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Tomorrow's Mores: the Future Geopolitical System and the Structure of the International Oil Market1

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Tomorrow's Mores: the Future Geopolitical System and the Structure of the International Oil Market1 © English version CIEP/ Spanish version Politica Exterior available at www.politicaexterior.com, number 112 Tomorrow's Mores: The future geopolitical system and the structure of the international oil market1 Coby van der Linde, Wilbur Perlot, Femke Hoogeveen2 Abstract Projections of oil demand and supply in the coming decades imply that major consumer countries must increasingly compete for the same oil flows. The international political and economic framework governing this competition is unclear at the moment. The bi- polar system of international relations of the 1970s has made way for the post-cold war uni-polar situation of the 1990s, in which the mores of the market oriented system was expected to become the global mores. Recently, trends that would take the international system in a different direction have come to the fore. For instance, the re-emergence of resource nationalism has brought competition for oil in the realm of politics rather than economics. Such a development impacts on the risk assessment and questions the in situ security of supply policies. What the exact rule-set of the geopolitical system of tomorrow will be is unclear. Security of oil supplies policies therefore need to be reviewed on robustness for different geopolitical futures and the new fundamentals of the oil market. 1. Introduction Oil is politics. Securing access to cheap oil is part of national economic and foreign policies. Although, the relative contribution of oil to economic growth has declined, the structural dependence on oil in some sectors, for instance the transportation sector, and the oil price-linkages to other sectors, for instance gas, can imply that the economic impact of scarcity and/or a disruption is still disproportionably large. Therefore, security of oil supply matters. Moreover, because of the international political and economic dimensions, security of energy supply policies increasingly fall within the realm of both energy and foreign policy. After a period of low prices and relative abundance of oil in the 1990s, the market has become very tight due to increasing demand and low investment levels in the 1990s. Spare production capacity has reached a very low level indeed. The current, often, unrelated short disruptions of production in various producing countries and the growing demand in the dynamic Asian economies of India and China has created a tight market situation in which every uncertainty about supply, real or imagined, translates in higher prices. Furthermore, the change of the international oil market from a buyers into a sellers market has renewed the assertion of the producing countries that they should benefit from a fair distribution of economic rents. In the period 1985-1999, consumer countries had successfully captured those benefits. The debate about the rent distribution in the value chain includes a debate about the organisational structure of the oil sector in countries and investor access to reserves, and renewed fears of the use oil (and gas) in power politics. Since 1989, the geopolitical system is changing. The past has shown that in the case of oil, the state of the world matters to the way in which energy diplomacy is accomplished. 1 This article is based upon: Hoogeveen, F. and Perlot, W. (eds), Tomorrow's Mores: The International System, Geopolitical Changes and Energy, The Hague, December 2005; Van der Linde, C., Energy security in a changing world, In: Bracken, P, et al, Managing Strategic Surprise; Lessons from Risk Management & Risk Assessment, Eurasia Group, September 2005; and Van der Linde, C., Energy in a changing world, Inaugural address, December 2005, Clingendael Energy Papers no. 11, available at www.clingendael.nl/ciep. 2 Coby van der Linde is director of the Clingendael International Energy Programme and Professor of Geopolitics and Energy Management at Groningen University. Wilbur Perlot and Femke Hoogeveen are researchers at the Clingendael International Energy Programme. Clingendael International Energy Programme 1/11 © English version CIEP/ Spanish version Politica Exterior available at www.politicaexterior.com, number 112 Oil policies and energy relations will shape along the lines of the future international system.3 This article will argue that the changing nature, intensity and rules of competition for oil require an re-examination of the effectiveness of some security of energy supply policy instruments. Section 2, presents an overview of security of oil supply policies in relation to the oil market developments and the geopolitical system of the 1970s. At the end of the Cold War in 1989, this previous bipolar geopolitical system was seemingly replaced by a unipolar system (section 3). Starting around 2002, the oil market rapidly turned from a buyers' market into a sellers' market. At the same time the changes in the geopolitical system became apparent (section 4). How effective can we expect the traditional security of oil supply policies to be in the new market conditions? This depends for a large part on the mores determining future geopolitical and economic relations. We distinguish three possible futures (section 5) before coming to the concluding remarks (section 6). 2. Oil revisited The oil market of the early 1970s easily compares with today's to the extent that also then strong oil demand growth and discussions over the distribution of economic rents were important matters. From this decade stem two fears which still drive current energy security policy. The first is the fear that energy (oil, natural gas) will be willfully used as a political weapon, or at least as a means to gain political leverage. The source of this fear lies in the events surrounding the 1973 oil crisis (oil embargo). The second is the fear originating in the 1979 oil crisis that political instability in producer countries (in this case the Iranian Islamic revolution) and regional tensions will lead to a reduction or disruption of oil supplies (Iran-Iraq war in the 1980s, the first Gulf war and the gas conflict between the Ukraine and Russia in 2006).4 Today these fears feature prominently in policy documents throughout the world, including the new Green Paper of the European Commission. This paper states: “Our import dependency is rising. Unless we can make domestic energy more competitive, in the next 20 to 30 years around 70% of the Union’s energy requirements, compared to 50% today, will be met by imported products – some from regions threatened by insecurity.” 5 The turbulent 1970s led to the formulation of a set of successful security of supply policies: • Diversification of supply, predominantly away from OPEC and Middle East producers; • Maximising indigenous production, for example in the North Sea and Alaska; • A crisis regime to deal with supply disruptions, the IEP within the International Energy Agency (IEA); • Diversification to source to change the fuel mix, for example nuclear and coal power stations instead of oil fired power plants; • More efficient use of energy; 3 Correljé, A. and Van der Linde, C., Energy supply security and geopolitics: A European perspective, In: Energy Policy, 34 (2006), p. 533. 4 In 1979 the Iranian revolution caused a disruption of roughly 4-5% of total global supplies. However, the combination of expected future oil demand growth, instability in the oil industry, contradicting and conflicting policies by consuming countries, policies by producing countries to profit from higher prices and the effect of the emotion of uncertainty, made it possible that this disruption of 4-5% translated into a price increase of 260%. Yergin, D., The Prize; The Epic Quest for Oil, Money and Power, 1991, Free Press, New York, pp. 684-6. 5 European Commission, A European strategy for Sustainable, Competitive and Secure Energy, COM 2006, p. 3. Clingendael International Energy Programme 2/11 © English version CIEP/ Spanish version Politica Exterior available at www.politicaexterior.com, number 112 • Incorporating energy in foreign and security policy, for example by building good and strong relations with producer countries. In the wake of the 1973 crisis, the US feared that the EU member states’ import dependence made them too vulnerable to withstand Arab political pressure, thwarting other political and strategic interests. To counter this, the US was a strong advocate to form a common front to OPEC. The International Energy Agency (IEA) was established in 1974 and the signatories agreed, among other things, on a common crisis policy.6 The signatories were all members of the US-led ‘market-oriented’ group of (Western) countries that had participated in the Bretton Woods system and the more informal monetary system after 1973. Cooperation within IEA took place within the group of market oriented industrialized countries. The IEA member states successfully switched to other non-OPEC suppliers in the 1980s when these resources could be developed under the new post-1973 OPEC price regime. The impact of the 1973/74 oil crisis on the group of centrally planned economies (Soviet Union and East Europe) united in the Comecon was not immediate but rather, came with a delay. Although the Comecon countries were self-sufficient in oil, their oil prices were calculated on the basis of average world market prices; initially based on a five year moving average and after 1973 on a one year average. The oil price increase made exports to the world market very attractive compared to inter-Comecon trade, except in the period 1985-1987 when world market prices declined and Comecon prices lagged. As a result, the share of the Soviet- Union and later Russia in EU-15 crude oil supply, for instance, increased from 5,2 percent in 1978 to 15,9 percent in 1988 and 28 percent in 2004. The ultimate impact of the 1973/74 oil crisis on the Comecon countries was the that the autarkic energy system became more integrated in the world market. The impact of the diversification of supply policies is evidenced by the declining share of North African and Middle East countries in, for instance the oil supply of EU-15, which declined from almost 70 percent in 1978 to 32 percent in 1985, increased to 45 percent in 1991, and declined again to 31 percent in 2004.
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